Climate change developments: round-up

by Brendan Bateman

The second Emissions Reduction Fund auction is about to begin, and a new post-2020 emissions target has been set.

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There have been a number of recent developments in Australian climate change policy, with the second Emissions Reduction Fund auction, a new post-2020 emissions target, and draft rules for the Safeguard Mechanism as the highlights, and more to come in the lead-up to the next UNFCCC meeting in Paris later this year.

Second Emissions Reduction Fund auction will have new variable volume threshold

Rules and a date for the second Emissions Reduction Fund auction have been released, and the key change in the process is the introduction of a new variable volume threshold to determine successful auction bids.

As in the first auction, all bids that met the (undisclosed) benchmark price will be ranked by price offered, with the lowest price bids being ranked first and the highest price bids being ranked last. Bids offering the same price will be ranked equally.

Starting with the lowest price bid, the ACCUs offered for sale through that bid will be added to a notional pool of ACCUs. It's at this point that the process changes.

Previously if the total number of ACCUs in the pool did not exceed 80 percent of the overall volume, then that bid was selected.

Now, the Clean Energy Regulator can accept between 50 and 100 percent of the volume of abatement offered at auction below the benchmark price. The precise threshold will be selected by the Regulator "at the point where the bids represent best value for money". Arguably, this amendment means that the ERF is even less of an auction than a competitive tender process.

Timeline for the second Emissions Reduction Fund auction

Project registration closes 18 September 2015 (midnight AEST)

Auction qualification closes 6 October 2015 (midnight AEST)

Auction registration closes 27 October 2015

Each participant and authorised bidder notified of their results 12 November 2015

Average price per tonne of abatement published 12 November 2015

Post-2020 emissions target announced

In August, the Federal Government announced Australia's post-2020 target to take to the UNFCCC conference in Paris at the end of this year. Formally known as Australia's Intended Nationally Determined Contribution (INDC) to that conference, the target proposes a reduction of Australia's emissions by 26-28% by 2030 based on 2005 levels.

The target is certainly not as ambitious as that recommended by the Climate Change Authority whose report released in July advocated targets of 30% below 2000 levels by 2025, and 40-60% below 2000 levels by 2030.

By and large, the response to the announced target has been underwhelming ‒ that is, expected, but still disappointing.

Irrespective of whether the announced target is sufficiently ambitious, meeting this new target remains a challenge given the current suite of emissions reduction policies available to the Government. The Government has indicated that it will meet the target by implementing a "suite of Direct Action policies" including the ERF and Safeguard Mechanism, along with the Renewable Energy Target and initiatives in energy efficiency and energy productivity. It also announced additional funding for the ERF of $200m per year between 2018-2030, bringing the total amount of public money available to purchase reductions from domestic projects to $4.95bn.

While using international credits to meet the target remains an option, the new target will place increased importance on the effective role that can and should be played by the Safeguard Mechanism.

Rules for the Safeguard Mechanism released for public consultation

As part of the Government's deal with the cross-bench Senators to establish the ERF, the legislation provides the framework for the Safeguard Mechanism, with matters such as the setting of baselines for covered entities to be in rules.

Those rules have now been released in draft form for public consultation:

The draft rules released on Wednesday 2 September apply to facilities that emit more than 100,000 tonnes of greenhouse gas annually, but the applicable baselines will vary, depending upon the sector. It is estimated that the Safeguard Mechanism will apply to about 140 businesses.

For emitters other than grid connected electricity generators, the baseline will be set at each site's highest emissions level from 2009-10 to 2013-14, but these can be increased if the facility can show special circumstances.

Grid connected electricity generators' will have a sectoral baseline rather than individual facility baselines, and will be set by reference to total scope 1 emissions in 2009-10 (i.e. 198 million tonnes). Only if this sectoral baseline is exceeded, will baselines apply at a facility level. If this occurs, facility baselines will be set by reference to the highest emissions level from 2009-10 to 2013-14 as with other emitters.

Special provisions will apply to the waste sector to cover emissions from waste deposited after 1 July 2016, and operators in the transport sector have the option to define their facilities on either a national or state basis.

The baselines proposed by the rules will be set at least initially by reference to a facility's (or in the case of electricity, the sector's) highest historical emissions, and not averaged over any period, nor with any capacity to be adjusted. Consequently, as drafted, the rules will not contribute to achieving Australia's emission abatement target.

The Safeguard Mechanism is to come into effect on 1 July 2016, but it will be reviewed as part of the ERF review expected in 2017-18, which will look at wider issues including the use of international carbon units. The early review of the Safeguard Mechanism rules could be viewed as an attempt to circumvent threats by some cross-bench Senators, including Senator Nick Xenophon, to disallow rules that do not contribute to emissions reductions by holding out hope that tougher baselines could be set in the future. However the draft Explanatory Statement which accompanies the draft rules makes clear that it is the objective of the ERF, not the Safeguard Mechanism, to lower national emissions. The Safeguard Mechanism's role is to solely safeguard the value of funds spent under the ERF by ensuring purchased reductions are not displaced by a significant rise in emissions above business as usual.

The public consultation period for the draft rules closes on Monday, 21 September 2015 AEST 5pm.

The public consultation period on the draft Amendment Regulation and Audit Amendment Determination closes on Wednesday, 16 September 2015 AEST 5pm.

ALP supports an ETS (but not a carbon tax)

At the ALP Conference in late July, the Labor Party committed itself to establishing an emissions trading scheme (ETS) based on a cap and trade model similar to the Carbon Pollution Reduction Scheme (CPRS) proposed by the Rudd government in 2008, and the Carbon Price Mechanism (CPM) implemented by the Gillard government in 2012.

The ALP has been at pains to stress that its ETS is not a carbon tax, but has been mute on whether the scheme will involve a transitional fixed price period, as occurred with the CPM and proposed as part of the CPRS.

While specific design elements of the ETS are unlikely to be known until closer to the next election, a critical issue emerging for the ALP is transitioning the ERF (including existing contracts for supply of carbon abatement, and registered projects) to any new scheme. One aspect the ALP has made clear is that the tap of public money available to purchase ACCUs under the ERF will be turned off, which has the potential to leave registered projects or projects in the process of registering in limbo.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.